Analysts negative on China prospects

SURVEYS OF Chinese factories in May added to a gloomy picture for economic growth in the world’s second largest economy, suggesting the slowdown is broader than previously thought, hitting both domestic and overseas demand.

However, a move by Volkswagen to overhaul its senior management that will elevate China’s status within the management board showed foreign corporates remain bullish on the longer-term prospects for China.

The official Chinese Purchasing Managers’ Index (PMI), which covers China’s biggest companies – most of them state-owned – retreated to 50.4 per cent in May, ending its five months of consecutive growth. It was the weakest reading this year and down from April’s 13-month high, with output at its lowest since November 2011.

Meanwhile, the HSBC China manufacturing PMI, which tracks smaller private sector firms, retreated to 48.4 from 49.3 in April – its seventh straight month below the 50-mark, which demarcates expansion from contraction – with the employment sub-index falling to 48.1, its lowest level since March three years ago.

“There was further disappointment in today’s manufacturing PMIs from China,” said Mark Williams, chief Asia economist at Capital Economics.

“But the May surveys were largely conducted before the shift of policy stance in the last third of the month and so tell us nothing about the success of stimulus efforts so far.

“Most of the responses will have been collected too early to reflect any shift in activity or sentiment that followed that shift. We expect the PMIs to pick up soon as stimulus starts to take effect,” said Williams.

JPMorgan Chase estimates HFP expansion of 7.7 per cent this year, down from 9.2 per cent in 2011.

“The uncertainties surrounding the exit of Greece from the euro area and the sovereign debt crisis in peripheral countries have intensified substantially,” JPMorgan analysts said in the note, which was dated June 1st.

The risk is “a significant drag” on China’s economic recovery, the bank said.

While the government is unlikely to introduce a stimulus plan like the four trillion yuan (€510 billion) programme it introduced during the financial crisis in 2008, a further deterioration in economic conditions such as a collapse in the euro zone or the end of the single currency could trigger a change of heart.

The National Bureau of Statistics played down any risk of a more general economic downturn, saying no recession was imminent.

A worry, however, is how new orders have begun to shrink while inventories have started to rise. This could result in sluggish PMIs for the coming months, as companies will use existing inventories to meet any increased demand rather than boosting production.

Longer term, the Wolfsburg, Germany-based carmaker Volkswagen has created a management board position dedicated solely to China – its single largest market – to be filled by its commercial vehicles unit chief, Jochem Heizmann.

VW was the first overseas carmaker to enter China three decades ago, and with its two local partners is investing €14 billion up to 2016 to build factories around the country.